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KUALA LUMPUR: Malaysia's economy expanded at its fastest pace in more than three years in the third quarter, raising expectations of a interest rate hike at the central bank's next policy meeting in January.

Southeast Asia's third-largest economy has recovered this year after a rocky 2016, when growth slumped to its slowest pace since the global financial crisis in 2009. The turnaround in the economy may encourage embattled Prime Minister Najib Razak to call a general election before the August 2018 deadline.

Malaysia's economy grew 6.2 per cent in the third quarter from a year earlier, central bank data released on Friday (Nov 17) showed, topping a Reuters poll forecast of 5.8 per cent and recording the fastest growth since the second quarter of 2014.

The ringgit climbed to 4.158 versus the dollar on Friday after the GDP data was issued, its highest in a year. It has been hitting fresh year-highs since Wednesday. Central Bank governor Muhammad Ibrahim said the economy was on track to register growth of 5.2 to 5.7 per cent this year and may even exceed that estimate.

"Exports and the numbers look good so it would be a pleasant surprise (if GDP exceeds 5.7 per cent). But watch for the external environment. That will influence our growth, not only for Malaysia but also the world," Muhammad said at a news conference.

The government had earlier revised its 2017 full-year projection up from 4.3-4.8 per cent.

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Growth was driven largely by domestic demand, particularly private sector spending. Exports and private consumption will likely remain strong enough to prop up the economy going into the next quarter, the bank said.

Malaysia's current account surplus grew to RM12.5 billion (US$3 billion), up from RM9.6 billion in April-June.

The central bank said the ringgit currency has strengthened, but risks remained.

"Ringgit levels are a reflection of our economic strength, and there is more liquidity in the market now and it is not influenced by speculative flows anymore," Muhammad said.

"It is more reflective of financial flows in the domestic market."

In November last year, the central bank stepped in to discourage ringgit trade in the non-deliverable forwards (NDF) market, and later introduced measures to boost onshore ringgit trade.

The currency has so far gained 7.2 per cent on the dollar this year after hitting a near 19-year low of 4.4980 on Jan 4.

RATE HIKE?

The central bank left its benchmark rate unchanged last week but raised the possibility it may review the rate to suit improving economic conditions.

Muhammad told reporters on Friday that the bank will look at a review based on incoming data. A rate hike would be less about creating tighter monetary conditions and more about a "normalisation" of accommodative policy.

"We reiterate our call of a 25 basis point rate hike at BNM’s next meeting in January," Nomura said in a note after the announcement.

"We believe BNM will view the strong Q3 GDP print – with the fastest pace of growth since Q2 2014 – as opening a window to normalise its accommodative monetary policy stance."

BNM expects inflation to be in a higher range of 3 to 4 per cent for 2017, depending on oil prices.

The projected spike in inflation would be a worry for Prime Minister Najib, who may face a backlash from voters angered by rising living costs and the introduction of a broad-based consumption tax in 2015.

Najib faces his toughest election yet as he looks to counter bad publicity from a corruption scandal involving state-owned fund 1Malaysia Development Berhad (1MDB) and a growing challenge from Mahathir Mohamad, his former mentor turned rival.

Last month, the prime minister unveiled his last annual budget before the polls, promising sweeteners that would cut personal income tax for lower-income citizens, pay more to pensioners and spend billions on schools, hospitals and rural infrastructure.

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